Everything You Need To Know About Stablecoins

Published on 26 Sep 2023


Stablecoins, a prominent type of tethering crypto assets, have gained a lot of interest and respect in the world of cryptocurrencies, which is always changing. These tethering crypto assets have become an important link between the exciting but risky world of cryptocurrencies and the stable and well-known world of traditional finance. In this blog, we will learn about the world of stablecoins, what they are, and how they change how money works.

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The Volatility Conundrum

Cryptocurrencies, led by Bitcoin, have changed the world of finance by bringing digital currencies that are not controlled by a single body. They have a lot of benefits, like being able to do business across borders, being safe, and giving investors the chance to make a lot of money. But because of their volatility, they are often less useful for daily activities and as a way to keep value.

Cryptocurrency prices can change a lot in a short amount of time, which makes them dangerous for both sellers and buyers. Suppose you bought a cup of coffee with Bitcoin, but by the time you took your first sip, the value of Bitcoin had dropped by a lot. Because they are hard to predict, cryptocurrencies are not widely used in everyday deals or as a safe way to save money.

The Introduction of Stablecoins

Stablecoins were made to solve the problem of fluctuation. By linking them to an object or group of assets, these digital currencies are meant to keep their value stable. Most pegs are based on paper currencies like the US dollar (USD), commodities like gold, or various assets.

Stablecoins take the best parts of both standard currencies and cryptocurrencies and combine them into one. How they work is as follows:

1. Fiat-backed Stablecoins

Stablecoins backed by the dollar are the easiest to understand. They are backed by a bank account full of real cash. For example, the widely used USDC (USD Coin) is backed by one US dollar for every USDC. If you have one USDC, it's worth one US dollar.

This allows people to buy and sell things with tethering crypto currencies without worrying about the value changing as it does with Bitcoin or Ethereum.

2. Crypto-collateralized Stablecoins

Another type of stablecoin uses the collateralization model. When users lock up a certain amount of cryptocurrency as security, they get stablecoins in exchange. The security value is often more than the amount of stablecoins issued. This protects against price changes.

DAI, which is part of the MakerDAO community and backed by Ethereum, is the most well-known example. Users use Ethereum as security to make DAI tokens, which are supposed to be worth the same as a US dollar. The method uses smart contracts to ensure that the value of the Ethereum that is locked up stays higher than the value of the DAI given out.

3. Algorithmic Stablecoins

Algorithmic stablecoins use complicated formulas to control how much is in circulation and keep their value stable. They don't use security or stocks of cash. Instead, they change their quantity based on what the market wants and other things to stabilize prices.

One example is Ampleforth (AMPL), which tries to keep the stablecoin price close to one US dollar by changing the supply based on how much people want it.

Why Stablecoins Matter

Stablecoins offer several compelling benefits, making them a crucial component of the cryptocurrency ecosystem and a bridge to traditional finance:

1. Price Stability

Stablecoins offer a compelling advantage in the realm of cryptocurrencies due to their remarkable ability to uphold a stable value over time consistently. This inherent stability serves as a foundational pillar, rendering stablecoins highly versatile and adaptable to a wide range of practical applications.

One of the primary advantages of stablecoins lies in their capacity to facilitate everyday transactions. Unlike many volatile cryptocurrencies, stablecoins are designed to minimize price fluctuations, which makes them an ideal medium of exchange for routine purchases. Whether it's buying a cup of coffee, paying for groceries, or purchasing digital goods online, the predictability of stablecoin values ensures that users can confidently engage in transactions without fearing sudden and unpredictable value swings.

2. Fast and Cost-Effective Cross-Border Transactions

Stablecoins have emerged as a transformative force in the world of cross-border transactions, presenting a compelling alternative to the traditional banking and remittance systems plagued by delays and exorbitant costs. Their ability to streamline international money transfers is a game-changer, revolutionizing the way we think about global financial transactions.

Unlike traditional methods, which often involve multiple intermediaries, international regulations, and cumbersome clearance procedures, stablecoin transfers can be executed swiftly and efficiently. 

3. Accessibility

Stablecoins represent a groundbreaking leap in financial inclusion by democratizing access to digital financial services for individuals who have been traditionally underserved or excluded from the conventional banking infrastructure. The fundamental beauty of stablecoins lies in their simplicity: all that is required for participation is an internet connection and a digital wallet.

For a substantial portion of the global population, access to traditional banking services is either limited or entirely unavailable. In many regions, particularly in remote or rural areas, brick-and-mortar banks may be scarce or prohibitively distant. 

4. Financial Inclusion

Stablecoins, by their very nature, possess the transformative potential to be a catalyst for financial empowerment among unbanked and underbanked populations across the globe. This tethering crypto has the capacity to not only promote financial inclusion but also significantly alleviate the burden of costly remittance services, ultimately granting marginalized communities access to a means of storing and transferring value securely and efficiently.

One of the most remarkable aspects of stablecoins is their ability to bridge the financial divide. For millions of people who have been historically excluded from the traditional banking system, these digital assets offer an entry point into the world of finance. 

5. Decentralization

Stablecoins, which are often built upon blockchain networks, introduce a significant paradigm shift in the world of finance by embracing decentralization. This innovative approach not only reshapes the way financial transactions are conducted but also mitigates the risk of censorship and centralized control, fostering a more democratic and resilient financial system.

The foundation of many stablecoins lies within blockchain technology, a decentralized ledger system that operates on a global network of computers. This decentralization aspect is a stark departure from the traditional financial system, typically characterized by centralized authorities such as banks, governments, and regulatory bodies.

The Future of Stablecoins

Since their start, stablecoins have come a long way and made a big difference in the financial world. Undoubtedly, they could help bridge the gap between cryptocurrency and regular banking. Stablecoins will become even more important as the crypto business grows and rules become clearer.

1. CBDC Integration

The integration of stablecoins with central bank digital currencies (CBDCs) represents a highly intriguing and evolving area of interest within the financial and technological spheres. As governments and central banks delve into the possibilities of digital currencies, the potential role of stablecoins as an intermediary layer between CBDCs and the broader cryptocurrency ecosystem becomes increasingly significant.2. Enhanced Privacy and Security

The ongoing evolution of stablecoin projects reflects a growing recognition of the importance of enhancing privacy features while still adhering to regulatory compliance standards. This dynamic shift in the stablecoin landscape is paving the way for the development of innovative digital assets that strike a delicate balance between privacy and transparency, offering users the ability to choose the level of discretion that suits their needs.

3. Mass Adoption

Stablecoins, with their inherent stability and accessibility, are indeed poised for mass adoption, particularly in regions plagued by unstable currencies or where traditional financial services are limited. As these digital assets continue to gain prominence, their integration into everyday life is expected to flourish, reshaping the way people conduct financial transactions and manage their finances.

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In the end, stablecoins are an important link between the world of cryptocurrencies and regular banking. They provide stable prices, easy access, and financial equality, making room for blockchain creativity. But they must also deal with legal issues and practical risks that they must be careful with.

Stablecoins have a bright future as they persist in changing and adapting to meet the needs of an ever-changing financial world. Stablecoins will become a key part of the global financial system as they become more widely used and regulations clearer. They will give people and businesses a reliable and efficient way to make transactions and keep value in the digital age.

Featured image: Image by freepik


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